The International Monetary Fund confirmed today, Friday, that Sri Lanka’s economy is showing “initial signs of improvement”, but that recovery is still difficult, while Colombo must implement painful reforms.
IMF Deputy Director Kenji Okamura said the country is emerging from its unprecedented crisis thanks to reforms that include doubling taxes, cutting spending and eliminating subsidies.
A currency crisis since late 2021 has led to major shortages of food, fuel and medicine, sparking months of protests that toppled former President Gotabaya Rajapaksa in July.
“The current economic crisis stemmed from policy mistakes exacerbated by external shocks,” Okamura said in a statement Friday after meeting President Ranil Wickremesinghe and other leaders on Wednesday.
He continued, “We discussed the importance of fiscal measures, especially revenue measures, in order to restore macroeconomic stability.”
Sri Lanka defaulted on its $46 billion foreign debt in April last year and is still negotiating repayment with its bilateral and private creditors.
“The economic recovery is still difficult,” Okamura said.
“Now, more than ever, it is imperative that the momentum of reforms continue under the strong supervision of the Sri Lankan authorities and people,” he added.
In an address to the nation Thursday night, Wickremesinghe pledged to press ahead with the restructuring of loss-making state companies despite union resistance.
He said, “Rebuilding a bankrupt country is something that can only be achieved by following traditional methods. We have to adopt a new approach and move forward on a new journey of transformation.”
He pointed out that the official oil company, the one responsible for electricity service, and the national carrier (SriLankan Airlines) recorded losses of more than $1.32 billion in 2021, constituting a huge burden on the island’s 22 million people.
Wickremesinghe’s government received a $2.9 billion bailout from the International Monetary Fund in March under a 48-month program that requires Colombo to implement aggressive reforms.
And the restructuring of external debts was delayed due to the reluctance of the country’s most prominent bilateral creditor – China – to reduce the outstanding debts, preferring instead to offer new loans to Sri Lanka to pay off the old debts.
Bilateral debts to foreign governments account for just over $14 billion of total external debt, 52% of which is owed to China.